April 16, 2015

April 16th, 2015

Safeguards in Life

Sometimes, seatbelts in cars, helmets for cycling and skiing, life jackets for boating or kayaking can be annoying and underappreciated until they save a life.

Diversification of an investment portfolio is a safeguard that is often underappreciated by many investors today after a long period of stock market gains.

A diversified portfolio is intended to prevent or significantly lessen losses during major market downturns and to recover losses much faster than an all equity portfolio.  Diversification also means not investing all of your portfolio in just the US stock market.

The domestic stock market as measured by either the S&P 500 or the Dow Jones was down in January, up in February and down again in Marchfinishing the first quarter with no meaningful gains relative to 12/31/14.

During the same time frame, our mutual fund portfolios, with 30% invested in several alternative strategies, clearly demonstrated the positive benefit of diversification across numerous asset classes. Check your results to see how much your portfolio increased during the period.

Impact of Inflation on Purchasing Power.

As inflation rises, your purchasing power after 20 years would drop significantly.

Inflation Rate Purchasing Power After 20 Years
0% 100%
2% 67%
3% 55%
4% 46%

Case Study: Individual at age 65 buys a Fixed Annuity paying 6% interest.

  1. Question: How long will it take to just get your principal back?

Answer:  6 years and 8 months!

  1. Question: Assuming a 3% inflation rate, how long will it take to just get your inflation adjusted principal back?

Answer:  About 23-1/2 years!

The Markets Last Week

Stocks Keep Climbing, as Bad News Turns Good

The major indexes gained nearly 2% as weak payroll data pointed to continued low interest rates and some deal news added more lift.

Stocks jumped a second consecutive week in quiet trading, with the major indexes up nearly 2% and again approaching all-time highs. The move came partly on a lagged reaction to the news on payrolls the previous Friday, April 3, when markets were closed for Good Friday. Reawakened animal spirits also buoyed investors, after some major deal announcements, which lifted the industrials sector 3.3%.

Markets returned to seeing bad news as good news since the much weaker than expected March payrolls suggested interest rates will remain lower for longer. That was countered Thursday, however, by weekly jobless claims, which fell to a 15-year low. Energy stocks rose 3%, helped along by higher crude prices.

Last week, the Dow Jones Industrial Average rose 294 to 18057.65, while the Standard & Poor’s 500 index gained 35 to 2102.06. For both it was a 1.7% rise. The Nasdaq Composite gained 109 points or 2.2% to 4995.98.

“We didn’t get to trade on it, and the Good Friday payrolls had a ‘slopover’ effect on stocks this week,” says Kim Forrest, a senior equity analyst at Fort Pitt Capital Group. It’s sloppy because everyone thought it was bad news last week, but when it comes to keeping interest rates low, bad news remains good news, she adds.

Corporate action, such as General Electric ’s (ticker: GE) divestment plans, was a “bright light,” she adds, particularly Friday. That’s when GE said it would sell or spin off most of its GE Capital finance unit and return up to $90 billion to shareholders. (For more on GE, see the feature.) The stock rose 11% to $28.51. And Wednesday, the weakened energy industry saw oil major Royal Dutch Shell (RDS/A) announce a $70 billion deal to buy gas giant (BRGYY).

In normal times, the jobless claims number would push the Federal Reserve to move on rates, says Wedbush Equity Management portfolio manager Stephen Massocca.

But the Fed is hemmed in by incredibly low interest rates in the rest of the world, he notes, which are driving flows to Treasuries and keeping yields low. We are in a world where German 10-year Bunds yield 0.15%. The way things stand, the market is now looking for the first rate hike in December or possibly 2016, he says.

But the uncertainty occasioned by the Fed guessing game is weighing on investors, adds Bernie McGinn, CEO of McGinn Investment Management. “We spend two weeks jacked up [about lower rates] and then one week not.” At some point investors are going to want to take a break from stocks, says McGinn, who’s looking for a real correction, down 20%, in the summer or later.

Before that, however, investors will have to go through the first-quarter earnings season, now under way. And they will be watching the March U.S. consumer-price index, out this Friday. (Source: Barron’s Online).

Investing Quote of the Week

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Peter Lynch



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